PSBs may seek more tangible collateral from promoters seeking credit

With rising concerns over bad loans, promoters seeking credit from state-run banks may now have to provide for more tangible collateral than personal guarantee or share conversion clause.

NEW DELHI: With rising concerns over bad loans, promoters seeking credit from state-run banks may now have to provide for more tangible collateral than personal guarantee or share conversion clause. The initiative is part of a mechanism to strengthen credit sanctioning that the public sector banks are adopting in consultation with the finance ministry, a senior official familiar with the development told ET.

"There are no directives. All these steps are to be taken by the banks themselves," said a finance ministry official, adding that some of these checks and balances will be put in place as envisaged under a joint lending mechanism involving a consortium of banks.

These steps will be followed mostly in cases of large accounts or consortium-led lending, said a state-run bank's chairman, who did not wish to be named. "Individually banks will have the discretion to take personal guarantee or share conversion clause in the event of default," the chairman said.

In case of a large exposure, the banks will also monitor the performance of the company bi-annually to strengthen financial discipline in operations and management of the group. Besides, the banks will ask the promoters to include eminent personalities in their board of directors to instil confidence among the investors.

"Some of these steps will ensure that there is greater accountability. In fact, the central bank has also made a case for more stringent measures," said the finance ministry official quoted earlier.

The government is already preparing a case study on the basis of big corporate defaults over the past six months to prescribe checks and balances that can be implemented to safeguard state-run banks.

According to RBI, the net NPA (non-performing assets) ratio of PSBs stood at 1.53% in 2011-12 against 1.09% in 2010-11, an increase of 44 basis points.

The net NPA ratio of private banks, however, decreased by 10 basis points over the same period to 0.46% from 0.56%.

In September, a RBI working group on restructuring of advances had noted in its report that banks are being burdened with shares or preference shares of non-viable companies as a result of restructuring of their debt. The group had observed that in a few cases of restructuring unreasonable losses were allocated to the lenders as a result of conversion of debt into equity shares at a very high premium over the prevailing market price.

It had suggested that RBI may prescribe conversion of debt into equity shares on restructuring cannot take place at off-market rates or at a price higher than the latest available market price. It also recommended a ceiling or restriction on conversion of debt into zero or very low interest preference shares.